Problem 7-19 Credit policy decision with changing variables [LO7-4]

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. a-1. Calculate the incremental income after taxes.

a-2. Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.)

a-3. Should Fast Turnstiles Co. extend credit to these customers?

	Yes
	No

b-1. Calculate the incremental income after taxes if 15 percent of the new sales prove to be uncollectible.

b-2. Calculate the return on incremental investment if 15 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

b-3. Should credit be extended if 15 percent of the new sales prove uncollectible?

	Yes
	No

c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

c-2. Should credit be extended if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible?

	Yes
	No